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When Do Futures Destabilize Spot Prices?

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  • Newbery, David M

Abstract

Futures markets allow agents to shift price risk onto speculators and encourages them to take riskier decisions. Historically their main impact has been to encourage the storage of commodities, thus arbitraging prices over time and reducing price fluctuations. This paper presents a simple model in which opening futures markets in a nonstorable commodity encourages producers to choose riskier production techniques which destabilizes supply and hence the spot price. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Newbery, David M, 1987. "When Do Futures Destabilize Spot Prices?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 291-297, June.
  • Handle: RePEc:ier:iecrev:v:28:y:1987:i:2:p:291-97
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    1. repec:kap:jrefec:v:56:y:2018:i:4:d:10.1007_s11146-017-9606-3 is not listed on IDEAS
    2. Bozic, Marin, 2011. "Three essays in commodity futures and options price performance," Faculty Theses and Dissertations 160678, University of Minnesota, Department of Applied Economics.
    3. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    4. Patrick Artus & Claude Jessua, 1996. "La spéculation," Revue Économique, Programme National Persée, vol. 47(3), pages 409-424.
    5. Uluc, Arzu, 2015. "Stabilising house prices: the role of housing futures trading," Bank of England working papers 559, Bank of England.
    6. Patrick Artus, 1990. "Quand la création d'un marché à terme peut-elle déstabiliser le cours au comptant ?," Revue Économique, Programme National Persée, vol. 41(1), pages 71-94.
    7. Patrick Artus, 1996. "Création d'un marché à terme, nature des imperfections financières et stabilité du prix au comptant," Revue Économique, Programme National Persée, vol. 47(5), pages 1043-1062.
    8. C. W. Morgan, 1999. "Futures Markets and Spot Price Volatility: A Case Study," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 247-257.
    9. Bensaid, B. & Boutillier, M., 1997. "Le contrat notionnel : efficience et causalité," Working papers 44, Banque de France.
    10. Méndez Parra, Maximiliano, 2015. "Futures prices, trade and domestic supply of agricultural commodities," Economics PhD Theses 0115, Department of Economics, University of Sussex.

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